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December 23, 2022
2022-1950

Hong Kong introduces bill on tax concessions for family-owned investment holding vehicles

  • The Hong Kong Government has introduced a bill on the tax concessions for family-owned investment holding vehicles, once passed it will take retrospective effect from 1 April 2022.
  • Taxpayers engaged in asset and wealth management may review their investment structure and assess eligibility to the tax concessions.

Executive summary

The Hong Kong Government introduced the Inland Revenue (Amendment) (Tax concessions for family-owned investment holding vehicles) Bill 2022 (the Bill) on 9 December 2022 regarding a dedicated tax concession regime for family-owned investment holding vehicles (FIHVs) managed by eligible single-family offices (SFOs) in Hong Kong.

As outlined in our earlier Global Tax Alert,1 the proposed tax concession regime will exempt an FIHV and its eligible special purpose entities (SPEs) from profits tax in respect of its taxable profits earned from qualifying transactions carried out or arranged by an eligible SFO in Hong Kong. The provisions in the Bill are substantially consistent with that outlined in the consultation but indeed with several positive enhancements. The Bill is currently under review by the Hong Kong Legislative Council and once passed will take retrospective effect from 1 April 2022.

This Alert summarizes the key provisions of the Bill.

Detailed discussion

Similar to the existing unified fund exemption regime, an FIHV will be taxed at a 0% concessionary tax rate under the proposed tax concession regime in respect of its assessable profits earned from qualifying transactions carried out or arranged by an SFO in Hong Kong. This includes profits earned incidental to the qualifying transactions, subject to a 5% threshold. The tax concessions will also be provided to eligible SPEs2 owned by an FIHV in proportion to its beneficial interest in such SPEs.

The proposed tax concession regime will take retrospective effect from 1 April 2022. An FIHV can elect for the tax concessions by making an irrevocable election in writing.

Eligibility to the proposed regime

Qualifying requirements

Details

FIHV

An entity,3 whether established or created in or outside Hong Kong, is an FIHV for a year of assessment if:

  • The entity is not a business undertaking for general commercial or industrial purposes.
  • At all times during the year, one or more than one member of a family4 has at least aggregated 95% of the direct and indirect beneficial interest in the entity.5
  •  
  • Its central management and control are exercised in Hong Kong at all times during the year.
  • It is managed by an eligible SFO of the family which carries out any one of the investment activities6 for the FIHV.

Eligible SFO

A private company, whether incorporated in or outside Hong Kong, is an eligible SFO if:

  • Its central management and control are exercised in Hong Kong.
  • At least aggregated 95% of its direct and indirect beneficial interest is at all times during the year held by one or more than one member of the family.7
  • It provides services to specified persons8 of the family during the basis period for the year of assessment and the fees for the provision of those services are chargeable to Hong Kong profits tax.
  •  
  • It fulfils the safe harbor rule whereby at least 75% of the eligible SFO's assessable profits are derived from the services provided to specified persons of the family.

The Bill further proposes that no more than 50 FIHVs managed by the same eligible SFO may benefit from the proposed regime. The Bill relaxed the permitted scope of services so an eligible SFO can provide other services to members of the relevant family.

Qualifying transactions

  • Transactions in specified assets and transactions incidental thereto, subject to a 5% threshold. There is no tainting provision in the Bill so an FIHV undertaking non-qualifying transactions will only be subject to tax in respect to profits from that portion of transactions.
  • However, profits from investments in certain private companies (whether incorporated overseas or in Hong Kong) by FIHVs or eligible SPEs will not be eligible for the tax concessions if they fail the immovable property test; holding period test; and control and short-term asset test.
  • The qualifying transactions of an FIHV must be carried out in Hong Kong by or through an eligible SFO of the relevant family or arranged in Hong Kong by an eligible SFO
  • There is a minimum asset threshold whereby the aggregated net asset value of the specified assets of each relevant FIHV at the end of the FIHV's basis period for a year of assessment must be of at least HK$240 million (i.e., approximately US$31 million).9 The assets held by an eligible SPE of the relevant FIHV will be included in calculating the net asset value.

Substantial activities requirements

Subject to an "adequacy" test, the FIHV should at a minimum:

  • Have at least two full-time qualified employees in Hong Kong.
  • Incur at least HK$2 million (i.e., approximately US$0.3 million) of annual operating expenditure in Hong Kong for carrying out the investment activities for the year.

The qualified employees and operating expenditures incurred by an eligible SFO should be attributed to each FIHV for ascertaining the substantial activities requirements.

Outsourcing of investment activities by the FIHV to the SFO is permitted, provided that it is not for circumventing the substantial activities requirement.

The Bill contains specific anti-avoidance provisions, including anti-round tripping provisions and main purpose test.

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For additional information with respect to this Alert, please contact the following:

Ernst & Young Tax Services Limited, Hong Kong

Ernst & Young LLP (United States), Hong Kong Tax Desk, New York

Ernst & Young LLP (United States), Asia Pacific Business Group, New York

Ernst & Young LLP (United States), Asia Pacific Business Group, Chicago

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ENDNOTES

1 See EY Global Tax Alert, Hong Kong proposes family office tax concession regime, dated 22 March 2022.

2 An entity, whether established or created in or outside Hong Kong, is an eligible family-owned SPE or interposed family-owned SPE if it is beneficially owned (whether directly or indirectly) by an FIHV; and established or created solely for directly or indirectly holding and administering one or more investee private companies and any specified assets under Schedule 16C.

3 Entity is defined in the Bill to mean a body of persons (corporate or unincorporate) or a legal arrangement, and includes a corporation, a partnership and a trust. It should be able to cover commonly adopted forms of FIHVs such as foundations, discretionary trusts and anstalts.

4 Members of a family include a natural person and all of the related persons, whether alive or deceased. There is a two-year transitional arrangement in event of a person ceasing to be a spouse other than being deceased.

5 The beneficial interest of an FIHV and an eligible SFO can be held by different family members within the relevant family.

6 Investment activity in relation to an FIHV includes: (a) conducting research and advising on any potential investments to be made by the FIHV; (b) acquiring, holding, managing or disposing of property for the FIHV.

7 The beneficial interest of an FIHV and an eligible SFO can be held by different family members within the relevant family.

8 Specified persons in relation to a family means (a) an FIHV that is related to the family; (b) a family SPE in which an FIHV has a direct or indirect beneficial interest; (c) an interposed family SPE of an FIHV; and (d) a member of the family.

9 In event the aggregated net asset value for the subject year falls below the threshold, the requirement will still be regarded as satisfied so long as the aggregated net asset value at the end of the FIHV's basis period for any one of the two years of assessment immediately preceding the subject year met the threshold.

 

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